The strength of operating leverage is determined by the ratio. The effect of operating leverage and its impact on profit

The effect of operating leverage (or production leverage)is a phenomenon that is expressed in the fact that a change in sales volume (sales revenue) causes a more intense change in profit in one direction or another. As you know, all costs of an enterprise are divided into fixed and variable. In the short term, unlike constant ones, variable costs can change under the influence of adjustments in production (sales) volume. In the long term, all costs are variable. When sales volume changes, variable costs change proportionally, while fixed costs remain the same, thus, a huge positive potential for the company’s activities lies in saving on fixed costs, including costs associated with managing the enterprise.

A sharp change in the amount of fixed costs occurs due to a radical restructuring of the organizational structure of the enterprise during periods of mass replacement of fixed assets and qualitative “technological leaps”. Thus, any change in sales revenue generates an even stronger change in book profit.

The strength of the production lever depends on the share of fixed costs in the total costs of the enterprise.

The effect of production leverage is one of the most important indicators of financial risk, because it shows how much percent the balance sheet profit will change, as well as the economic profitability of assets if sales volume or revenue from product sales changes by 1%.

In practical calculations, to determine the strength of the impact of operating leverage on a specific enterprise, the result from product sales after reimbursement of variable costs, which is often called marginal income:

Contribution Margin = Sales Volume – Variable Costs

Marginal income = Fixed costs + EBIT

EBIT– operating profit (from sales before deduction of interest on loans and income tax).

Contribution Margin Ratio = Contribution Margin / Sales Volume

It is desirable that marginal income not only covers fixed costs, but also serves as a source of operating profit (EBIT)/

After calculating the marginal income, you can determine force of influence of the production lever (SVPR):

SVPR = Marginal Income / EBIT

The ratio expresses how many times marginal income exceeds operating profit.

Operating leverage effectcomes down to the fact that any change in sales revenue (due to a change in volume) leads to an even stronger change in profit. The action of this effect is associated with the disproportionate influence of fixed and variable costs on the result of the financial and economic activities of the enterprise when production volume changes.

Operating leverage forceshows the degree of business risk, i.e. risk of loss of profit associated with fluctuations in sales volume. The greater the effect of operating leverage (the greater the share of fixed costs), the greater the business risk.

Operating leverage is always calculated for a certain sales volume. As sales revenue changes, so does its impact. Operating leverage allows you to assess the degree of influence of changes in sales volumes on the size of the organization's future profit. Operating leverage calculations show the percentage change in profit if sales volume changes by 1%.

Thus, modern cost management involves quite diverse approaches to accounting and analysis of costs, profits, and business risk. You have to master these interesting tools to ensure the survival and development of your business.

44. Calculation of the break-even point. Profitability threshold
and financial strength margin

Break even corresponds to the sales volume at which the company covers all fixed and variable costs without making a profit. Any change in revenue at this point results in a profit or loss. In practice, two methods are used to calculate a given point: graphical and equational.

With the graphical method finding the break-even point comes down to constructing a complex graph “costs – production volume – profit”.

The break-even point on the graph is the point of intersection of straight lines built according to the value of total costs and gross revenue. At the break-even point, the revenue received by the enterprise is equal to its total costs, while the profit is zero. The amount of profit or loss is shaded. If a company sells products less than the threshold sales volume, then it suffers losses; if it sells more, it makes a profit.

Revenue corresponding to the break-even point is called threshold revenue . The volume of production (sales) at the break-even point is called threshold production volume (sales), if an enterprise sells products less than the threshold sales volume, then it suffers losses, if more, it makes a profit.

Equation method based on the use of a formula for calculating the break-even point

Qpcs = Fixed costs / (Price per unit of production - Variable costs per unit of production)

y =a + bx

a– fixed costs, b– variable costs per unit of production, x– the volume of production or sales at a critical point.

Profitability threshold- this is such sales revenue at which the company has no losses, but has not yet made a profit. In such a situation, sales revenue after recovering variable costs is sufficient to recover fixed costs.

Profitability Threshold = Fixed Costs / Contribution Margin Ratio

Coeff. contribution margin = (sales volume – variable costs) / sales volume

It is desirable that marginal income not only covers fixed costs, but also serves as a source of operating profit.

A company begins to make a profit when actual revenue exceeds a threshold. The greater this excess, the greater the margin of financial strength of the enterprise and the greater the amount of profit. Financial strength margin – the excess of actual sales revenue over the profitability threshold:

Margin of financial strength = ((Planned sales revenue – Threshold sales revenue) / Planned sales revenue) ´ 100%

The strength of operating leverage shows how many times profit will change if sales revenue changes by one percent.

45. Financial risks: essence, methods of determination and
management

In the most general form, risks are understood as the probability of losses or loss of income compared to the predicted option.

Types of financial risks:

· Risk of reduced financial stability(risk of imbalance in financial development) of the enterprise. Characterized by an excessive share of borrowed funds and an imbalance of positive and negative cash flows according to V.

· Insolvency risk(or the risk of unbalanced liquidity) of the enterprise. It is characterized by a decrease in the level of liquidity of current assets, which creates an imbalance in the positive and negative cash flows of the enterprise over time.

· Investment risk– the possibility of financial losses occurring when carrying out investment activities of the enterprise.

· Inflation risk– the possibility of depreciation of the real value of capital and expected income from financial transactions in conditions of inflation.

· Interest rate risk– an unexpected change in interest rates in the financial market.

· Currency risk consists in the shortfall in receipt of the intended income as a result of changes in the exchange rate of foreign currency used in the foreign economic operations of the enterprise.

· Deposit risk reflects the possibility of non-return of deposits.

· Credit risk– the risk of non-payment or untimely payment for finished products sold by the enterprise on credit.

· Tax risk the likelihood of introducing new taxes, changing the terms and conditions for making certain tax payments, canceling existing tax benefits, the possibility of increasing the level of rates

· Structural risk characterized by ineffective financing of the current costs of the enterprise, causing a high proportion of fixed costs in their total amount.

· Crime risk manifests itself in the form of its partners declaring fictitious bankruptcy (forgery of documents ensuring the misappropriation of monetary and other assets by third parties).

· Other types of risks– risks of natural disasters, risk of untimely implementation of settlement and cash transactions.

Main characteristics of the risk category:

1) Economic nature - financial risk manifests itself in the sphere of economic activity of the enterprise, directly related to the generation of income and possible losses in the implementation of financial activities.

2) Objectivity of manifestation - financial risk accompanies all types of financial transactions and all areas of its financial activities.

3) Probability of occurrence – the degree of probability of a risk event occurring is determined by the action of objective and subjective factors.

4) Uncertainty of consequences - financial risk may be accompanied by financial losses or the formation of additional income.

5) Expected unfavorable consequences - a number of extremely negative consequences of financial risk determine the loss of not only income, but also the capital of the enterprise, which leads to bankruptcy.

6) Level variability. The level of financial risk changes significantly over time, i.e. depends on the duration of the financial transaction.

7) The subjectivity of the assessment is determined by the different levels of completeness and reliability of information, the qualifications of financial managers, and their experience in the field of risk management.

Management of risks– this is a special field of activity (risk management), which is associated with the identification of forecasting analysis, measurement and prevention of risks, with their minimization, keeping within certain limits and compensation.

Risk management methods:

1) risk avoidance or avoidance;

2) transfer of risk;

3) localization of risk (limitation);

4) risk distribution;

5) risk compensation.

1. Avoidance or risk avoidance. Development of strategic and tactical solutions that exclude the occurrence of risk situations.

The decision to avoid risk is usually made at a preliminary stage, because refusal to continue the operation often entails not only financial, but also other losses, and is sometimes difficult due to contractual obligations. Risk Avoidance Measures:

· refusal to carry out financial transactions with a high level of risk. Its use is limited, because most financial transactions are related to the main production and commercial activities;

· refusal to use large amounts of borrowed capital, which avoids one of the significant risks - loss of financial stability, but at the same time it reduces the effect of financial leverage;

· refusal of excessive use of current assets in low-liquidity form;

· refusal to use temporarily free monetary assets as short-term financial investments, which avoids deposit and interest risks, but gives rise to inflation risk and the risk of lost profits;

· refusal of services from unreliable partners;

· rejection of innovative and other projects where there is no confidence in their feasibility and effectiveness.

The implementation of these measures must be carried out under the following conditions:

· if the refusal of one type of risk does not entail the occurrence of a higher one;

· if the degree of risk is not comparable with the level of profitability of the proposed financial transaction;

· if financial losses exceed the possibility of their compensation at the expense of own funds

· if the income from a risky operation is insignificant;

· if risky operations are not typical for the company.

2. Transfer of risk– transfer of risk to other persons by insurance or transfer to partners in financial transactions by concluding contracts. The most dangerous financial risks are subject to insurance. However, insurance is not applicable:

· when establishing new types of products or technologies;

· when insurance companies do not have statistical data to carry out calculations.

Financial risk insurance– insurance that provides for the insurer’s obligations for insurance payments in the amount of full or partial compensation for losses as a result of: stoppage of production, bankruptcy, unforeseen expenses, failure to fulfill contractual obligations, etc.

Transfer of risk by concluding a guarantee agreement or providing a guarantee, i.e. The guarantor undertakes to be responsible to the creditor for the fulfillment of the obligation in whole or in part. The bank acts as a guarantor.

Transfer of risk suppliers of raw materials and materials(subject of transfer – risks associated with damage or loss of property).

Transfer of risk investment project participants. Here it is important to clearly delineate the spheres of action and responsibility of the participants.

Transfer of risk by factoring conclusions. The subject of the transfer is the company’s credit risk (the same as accounts receivable insurance).

Transfer of risk by exchange transactions(For example, hedging).

3. Localization of risk. It involves delineating the system of rights, powers and responsibilities so that the consequences of risk situations do not affect the implementation of management decisions. Limitation is implemented by establishing internal financial standards at the enterprise. Localization of risks includes measures for the creation of venture (risk) enterprises, the allocation of specialized units and the use of standards.

System of financial standards:

· maximum amount of borrowed funds by type of activity;

· minimum amount of assets in highly liquid form;

· maximum size of a commodity or consumer loan to one buyer;

· maximum size of deposit in one bank;

· the maximum amount of investment in securities of one issuer;

· maximum period for diversion of funds into accounts receivable.

4. Risk sharing– between market subjects. Basic methods of risk distribution:

· diversification of activities (in the production sector: increasing the number of technologies, expanding the range, focusing on different groups of consumers and suppliers, regions; in the financial sector: income from various financial transactions, building a loan portfolio, long-term financial investments, work in several segments of the financial market) ;

· diversification of investments – preference for several projects with low capital intensity

· diversification of the securities portfolio;

· diversification of the deposit portfolio;

· diversification of the credit and foreign exchange portfolio.

5. Risk compensation. Basic methods:

· strategic planning;

· forecasting the economic situation, developing development scenarios and assessing the future state of the business environment (behavior of partners, competitors, changes in the market);

· active targeted marketing – creating demand for products;

· monitoring of the socio-economic and regulatory environment – tracking current information and socio-economic processes;

· creation of a system of reserves within the enterprise.

1.2 Effect of operating leverage. Essence and calculation methods

the impact of operational analysis

Operational analysis works with such parameters of enterprise activity as costs, sales volume and profit. Of great importance for operational analysis is the division of costs into fixed and variable. The main quantities used in operational analysis are: gross margin (coverage amount), strength of operating leverage, profitability threshold (break-even point), margin of financial strength.

Gross margin (coverage amount). This value is calculated as the difference between sales revenue and variable costs. It shows whether the company has enough funds to cover fixed costs and make a profit.

The strength of the operating lever. Calculated as the ratio of gross margin to profit after interest but before income taxes.

The dependence of the financial results of the operating activities of the enterprise, ceteris paribus, on assumptions related to changes in the volume of production and sales of commercial products, fixed costs and variable costs of production, constitutes the content of the analysis of operating leverage.

The impact of an increase in the volume of production and sales of marketable products on the profit of an enterprise is determined by the concept of operating leverage, the impact of which is manifested in the fact that a change in revenue is accompanied by a stronger dynamics of changes in profit.

Along with this indicator, when analyzing the financial and economic activities of an enterprise, they use the value of the effect of operating leverage (leverage), which is the inverse of the safety threshold:

Or ,

where EOR is the effect of operating leverage.

Operating leverage shows how much profit will change if revenue changes by 1%. The effect of operating leverage is that a change in sales revenue (expressed as a percentage) always leads to a larger change in profit (expressed as a percentage). The strength of operating leverage is a measure of the business risk associated with the enterprise. The higher it is, the greater the risk shareholders bear.

The value of the operating leverage effect found using the formula is subsequently used to predict changes in profit depending on changes in the company’s revenue. To do this, use the following formula:

where D BP is the change in revenue in %; D P - change in profit in%.

The management of the Tekhnologiya enterprise intends to increase sales revenue by 10% (from UAH 50,000 to UAH 55,000) due to the growth in sales of electrical goods, without going beyond the relevant period. Total variable costs for the initial option are 36,000 UAH. Fixed costs are equal to 4,000 UAH. You can calculate the amount of profit in accordance with the new volume of revenue from product sales using the traditional method or using operating leverage.

Traditional method:

1. Initial profit is 10,000 UAH. (50,000 - 36,000 - 4,000).

2. Variable costs for the planned volume of production will increase by 10%, that is, they will be equal to 39,600 UAH. (36,000 x 1.1).

3. New profit: 55,000 - 39,600 - 4,000 = 11,400 UAH.

Operating leverage method:

1. Operating leverage: (50,000 - 36,000 / / 10,000) = 1.4. This means that 10% growth in revenue should bring an increase in profit by 14% (10 x 1.4), that is, 10,000 x 0.14 = 1,400 UAH.

The effect of operating leverage is that any change in sales revenue leads to an even greater change in profit. This effect is associated with the disproportionate impact of semi-fixed and semi-variable costs on the financial result when the volume of production and sales changes. The higher the share of semi-fixed expenses and production costs, the stronger the impact of operating leverage. And, conversely, with an increase in sales volume, the share of semi-fixed expenses falls and the impact of operating leverage decreases.

The profitability threshold (break-even point) is an indicator characterizing the volume of product sales at which the enterprise's revenue from the sale of products (works, services) is equal to all its total costs. That is, this is the sales volume at which the business entity has neither profit nor loss.

In practice, three methods are used to calculate the break-even point: graphical, equations and marginal income.

With the graphical method, finding the break-even point comes down to constructing a complex graph “costs - production volume - profit”. The sequence of constructing the graph is as follows: a line of fixed costs is plotted on the graph, for which a straight line is drawn parallel to the x-axis; Some point is selected on the abscissa axis, that is, some volume value. To find the break-even point, the value of total costs (fixed and variable) is calculated. A straight line is drawn on the graph corresponding to this value; Any point on the x-axis is again selected and the amount of sales revenue is found for it. A straight line corresponding to this value is constructed.

Direct lines show the dependence of variable and fixed costs, as well as revenue on production volume. The point of critical production volume shows the volume of production at which sales revenue is equal to its full cost. After determining the break-even point, profit planning is based on the effect of operational (production) leverage, that is, that margin of financial strength at which the enterprise can afford to reduce sales volumes without leading to unprofitability. At the break-even point, the revenue received by the enterprise is equal to its total costs, while the profit is zero. Revenue corresponding to the break-even point is called threshold revenue. The volume of production (sales) at the break-even point is called the threshold volume of production (sales). If a company sells products less than the threshold sales volume, then it suffers losses; if it sells more, it makes a profit. Knowing the profitability threshold, you can calculate the critical production volume:

Margin of financial strength. This is the difference between the company's revenue and the profitability threshold. The margin of financial strength shows by what amount revenue can decrease so that the company still does not incur losses. The financial strength margin is calculated using the formula:

FFP = VP – RTHRESHOLD

The higher the operating leverage, the lower the margin of financial strength.

Example 2. Calculation of the operating leverage force

Initial data:

Revenue from product sales - 10,000 thousand rubles.

Variable costs - 8300 thousand rubles,

Fixed costs - 1500 thousand rubles.

Profit - 200 thousand rubles.

1. Let's calculate the force of influence of the operating lever.

Coverage amount = 1500 thousand rubles. + 200 thousand rub. = 1700 thousand rubles.

Operating lever force = 1700 / 200 = 8.5 times

2. Suppose that sales volumes are forecast to increase by 12% for the next year. We can calculate by what percentage the profit will increase:

12% * 8,5 =102%.

10000 * 112% / 100= 11200 thousand rubles

8300 * 112% / 100 = 9296 thousand rubles.

11200 - 9296 = 1904 thousand rubles.

1904 - 1500 = 404 thousand rubles.

Lever force = (1500 + 404) / 404 = 4.7 times.

From here, profit increases by 102%:

404 - 200 = 204; 204 * 100 / 200 = 102%.

Let's determine the profitability threshold for this example. For these purposes, the gross margin ratio should be calculated. It is calculated as the ratio of gross margin to sales revenue:

1904 / 11200 = 0,17.

Knowing the gross margin ratio - 0.17, we calculate the profitability threshold.

Profitability threshold = 1500 / 0.17 = 8823.5 rubles.

Analysis of the cost structure allows you to choose a strategy for behavior in the market. There is a rule when choosing profitable assortment policy options - the “50: 50” rule.

Cost management in connection with the use of the effect of operating leverage allows you to quickly and comprehensively approach the use of enterprise finances. To do this, you can use the “50/50” rule.

All types of products are divided into two groups depending on the share of variable costs. If it is more than 50%, then it is more profitable for the submitted types of products to work on reducing costs. If the share of variable costs is less than 50%, then it is better for the company to increase sales volumes - this will give more gross margin.

Calculation of the above values allows us to assess the sustainability of the company’s business activities and the business risk associated with it.

And if in the first case the chain is considered:

Cost (Cost) - Volume (Sales Revenue) - Profit (Gross Profit), which makes it possible to calculate the indicator of profitability of turnover, the self-sufficiency coefficient and the indicator of profitability of production by costs, then when calculating by cash flows we have an almost similar scheme:

Cash outflow - Cash inflow - Net cash flow, (Payments) (Receipts) (Difference) which makes it possible to calculate various indicators of liquidity and solvency.

However, in practice, a situation arises when an enterprise has no money, but there is profit, or there is money, but there is no profit. The problem lies in the discrepancy in the timing of the movement of material and cash flows. In most sources of modern financial and economic literature, the problem of liquidity - profitability is considered within the framework of working capital management and is missed when analyzing the processes of enterprise cost management.

Although from this perspective the most significant bottlenecks in the functioning of domestic industrial enterprises appear: payment, or rather “non-payment” discipline, problems of dividing costs into constant and variable, approaching the problem of intra-company pricing, the problem of assessing cash receipts and payments over time.

Theoretically, it is interesting that when considering the CVP model in terms of cash flows, the behavior of the so-called fixed and variable costs completely changes. It becomes possible to plan the level of “real” rather than prospective profitability within shorter periods, based on agreements for the repayment of accounts payable and receivable.

The use of operational analysis of the standard model is complicated not only by the above limitations, but also by the specifics of preparing financial statements (once a quarter, every six months, every year). For the purposes of operational management of costs and results, this frequency is clearly not enough.

Differences in the structure of an enterprise's assortment are also a bottleneck for this type of cost analysis. Considering the complexity of dividing mixed costs into fixed and variable parts, problems with the further distribution of allocated and “net” fixed costs for a specific type of product, the break-even point of a specific type of product of the enterprise will be calculated with significant assumptions.

In order to obtain more timely information and limit assumptions on the assortment, it is proposed to use a methodology that directly takes into account the movement of financial flows (payments for cost items and receipts for specific products sold, which ultimately form the cost of production and sales revenue).

The production activities of most industrial enterprises are regulated by certain technologies, GOSTs and established conditions for settlements with creditors and debtors. For this reason, it is necessary to consider the methodology in the context of cash flow cycles and production cycles.

There is a direct relationship between operating leverage and business risk. That is, the greater the operating leverage (the angle between revenue and total costs), the greater the business risk. But, at the same time, the higher the risk, the greater the reward

Low operating leverage

High level of operating leverage

1 - sales revenue; 2 - operating profit; 3 - operating losses; 4 - total costs; 5 - break-even point; 6 - fixed costs.

Rice. 1.1 Low and high levels of operating leverage

The effect of operating leverage comes down to the fact that any change in sales revenue (due to a change in volume) leads to an even stronger change in profit. The action of this effect is associated with the disproportionate influence of fixed and variable costs on the result of the financial and economic activities of the enterprise when production volume changes.

The strength of the operating leverage shows the degree of business risk, that is, the risk of loss of profit associated with fluctuations in sales volume. The greater the effect of operating leverage (the greater the share of fixed costs), the greater the business risk.

As a rule, the higher the fixed costs of an enterprise, the higher the business risk associated with it. In turn, high fixed costs are usually the result of a company having expensive fixed assets that require maintenance and periodic repairs.

1.3 Three components of operating leverage

The main three components of operating leverage are fixed costs, variable costs and price. All of them are related to sales volume to one degree or another. By changing them, managers can influence sales volume.

Change in fixed costs

If managers can significantly cut items attributable to fixed costs, for example, by cutting overhead costs, the minimum break-even volume can be significantly reduced. As a result, the effect of accelerated changes in profit will begin to operate at a lower level.

Reducing fixed costs by 25% from 200 rubles. up to 150 tr. led to a shift of the break-even point to the left by 100 pcs. or 25% from 400 pcs. up to 300 pcs. As can be seen from the figure, reducing fixed costs is a direct and effective way to reduce the minimum break-even volume in order to increase the profitability of the company.

Change in Variable Costs

A decrease in direct variable production costs leads to an increase in the contribution that each additional unit brings, which in turn affects an increase in profit, as well as a shift in the break-even point.

Reducing direct variable costs can be achieved by switching to new, more modern production materials or by reorienting to a supplier that offers less expensive components.

1 – new minimum break-even volume

2 – old minimum break-even volume

As can be seen from the figure, a 25% reduction in variable costs also led to an increase in profit and a shift in the break-even point by 11% from 400 units. up to 356 pcs. As we see, this shift is less significant than with the same share of reduction in fixed costs. The reason for this is that the reduction applies only to a small proportion of total production costs, since in this example the variable costs are relatively small.

Price Change

If changes in fixed and variable costs are in most cases controlled by management, then changes in prices in most cases are dictated by market requirements. A change in the price of a product usually affects the market equilibrium and directly affects the volume of production in physical terms. As a result, analysis of price changes will not be enough to determine its impact on break-even, since as a result of price changes, the volume of products sold will also change. In other words, a change in price may have a disproportionate impact on the volume of products sold. An increase in price can shift the break-even point to the left, but at the same time significantly reduce the volume of products sold, which will lead to a loss of profit. Also, an increase in price can shift the break-even point to the right, but at the same time increase sales volume so much that profit increases very significantly.

As we see, as a result of reducing the price of products by 100 rubles. The break-even point has shifted to 100 units. to the right. That is, now in order to achieve the same level of profit as before, the company must sell 100 units. additionally. As we see, price changes affect internal results, but often they have an even greater effect on the market. Therefore, if immediately after the price reduction, competitors in the market also reduced their prices, then this decision was wrong, since everyone’s profits decreased. If the advantage in increased sales volume can be obtained over a long period of time, then the decision to reduce the price was correct. Therefore, when changing prices, it is necessary to take into account market requirements rather than the internal needs of the enterprise.

Leverage is a characteristic of the potential ability to influence earnings before interest and taxes by changing the cost structure and output volume. 1.2. Operational analysis. The effect of production leverage, calculation of the “profitability threshold” and “financial strength reserves” The basis of financial management is financial economic analysis, within which the foreground...

The amount of deferred tax assets for the reporting period (STA), i.e. PE = Profit before tax - Current income tax + SHE - IT. 52. Information base for financial management The FM information system is a functional complex that ensures the process of continuous targeted selection of relevant informative indicators necessary for the analysis, ...

The strength of the operating lever. Calculated as the ratio of gross margin to profit after interest but before income taxes.

where EOR is the effect of operating leverage.

where VR is the change in revenue in %; P - change in profit in%.

Traditional method:

1. Initial profit is 10,000 UAH. (50,000 - 36,000 - 4,000).
2. Variable costs for the planned volume of production will increase by 10%, that is, they will be equal to 39,600 UAH. (36,000 x 1.1).
3. New profit: 55,000 - 39,600 - 4,000 = 11,400 UAH.

Operating leverage method:

1. The power of operating leverage:
50,000 - 36,000 / / 10,000) = 1.4. This means that 10% growth in revenue should bring an increase in profit by 14% (10 x 1.4), that is, 10,000 x 0.14 = 1,400 UAH.

In practice, three methods are used to calculate the break-even point: graphical, equations and marginal income.

Financial strength margin. This is the difference between the company's revenue and the profitability threshold. The margin of financial strength shows by what amount revenue can decrease so that the company still does not incur losses. The financial strength margin is calculated using the formula:

FFP = VP - RTHRESHOLD

The higher the operating leverage, the lower the margin of financial strength.

Example 2 . Calculation of the impact force of the operating lever

Initial data:

Revenue from sales of products - 10,000 thousand rubles.

Variable costs - 8300 thousand rubles,

Fixed costs - 1500 thousand rubles.

Profit - 200 thousand rubles.

1. Let's calculate the force of influence of the operating lever.

Coverage amount = 1500 thousand rubles. + 200 thousand rub. = 1700 thousand rubles.

Operating lever force = 1700 / 200 = 8.5 times

2. Suppose that sales volumes are forecast to increase by 12% for the next year. We can calculate by what percentage the profit will increase:
12% * 8,5 =102%.
10000 * 112% / 100= 11200 thousand rubles
8300 * 112% / 100 = 9296 thousand rubles.
11200 - 9296 = 1904 thousand rubles.
1904 - 1500 = 404 thousand rubles.

Lever force = (1500 + 404) / 404 = 4.7 times.

From here, profit increases by 102%:

404 - 200 = 204; 204 * 100 / 200 = 102%.

Let's determine the profitability threshold for this example. For these purposes, the gross margin ratio should be calculated. It is calculated as the ratio of gross margin to sales revenue:

1904 / 11200 = 0,17.

Knowing the gross margin ratio - 0.17, we calculate the profitability threshold.

Profitability threshold = 1500 / 0.17 = 8823.5 rubles.

Analysis of the cost structure allows you to choose a strategy for behavior in the market. There is a rule when choosing profitable options for assortment policy - the “50: 50” rule.

Calculation of the above values allows us to assess the sustainability of the company’s business activities and the business risk associated with it.

And if in the first case the chain is considered:

Cash outflow - Cash inflow - Net cash flow, (Payments) (Receipts) (Difference) which makes it possible to calculate various indicators of liquidity and solvency.

Rice. 1.

The effect of operating leverage is based on dividing costs into fixed and variable, as well as comparing revenues with these costs. The effect of production leverage is that any change in revenue leads to a change in profit, and profit always changes more than revenue.

The greater the share of fixed costs, the higher the production leverage and business risk. To reduce the level of operating leverage, it is necessary to strive to convert fixed costs into variable ones. For example, workers engaged in production can be transferred to piecework wages. Also, to reduce depreciation costs, production equipment can be leased.

Methodology for calculating operating leverage

The effect of operating leverage can be determined using the formula:

Let's look at the effect of production leverage using a practical example. Let's assume that in the current period the revenue amounted to 15 million rubles. , variable costs amounted to 12.3 million rubles, and fixed costs – 1.58 million rubles. Next year the company wants to increase revenue by 9.1%. Using the force of operating leverage, determine by how much percent profit will increase.

Using the formula, we calculate gross margin and profit:

Gross margin = Revenue – Variable costs = 15 – 12.3 = 2.7 million rubles.

Profit = Gross margin – Fixed costs = 2.7 – 1.58 = 1.12 million rubles.

Then the effect of operating leverage will be:

Operating Leverage = Gross Margin / Profit = 2.7 / 1.12 = 2.41

The operating leverage effect shows how much profit will decrease or increase if revenue changes by one percent. Therefore, if revenue increases by 9.1%, then profit will increase by 9.1% * 2.41 = 21.9%.

Let's check the result and calculate how much profit will change in the traditional way (without using operating leverage).

As revenue increases, only variable costs change, while fixed costs remain unchanged. Let's present the data in an analytical table.

Thus, profit will increase by:

1365,7 * 100%/1120 – 1 = 21,9%

The ratio of costs for a given sales volume, one of the measurement options of which is the ratio of marginal income to profit, is called operating leverage. This indicator is “quantitatively characterized by the ratio between fixed and variable expenses in their total amount and the variability of the indicator “earnings before interest and taxes”. It is higher in those companies in which the ratio of fixed costs to variable costs is higher, and correspondingly lower in the opposite case.

The operating leverage indicator allows you to quickly (without preparing a full income statement) determine how changes in sales volume will affect the company's profit. To find out by what percentage the profit margin will change, the percentage change in sales volume should be multiplied by the level of operating leverage.

One of the main tasks of analyzing the cost-volume-profit relationship is to select the most profitable combinations of variable and fixed costs, selling prices and sales volumes. The amount of marginal income (both gross and specific) and the value of the marginal income ratio are key in making decisions related to the costs and income of companies. Moreover, making these decisions does not require drawing up a new profit and loss statement, since only an analysis of the growth of those items that are supposed to be changed can be used.

When using the analysis, you must be clear about the following:

First, changing fixed costs changes the position of the break-even point, but does not change the size of the contribution margin.

Secondly, changes in variable costs per unit of production change the value of the contribution margin and the location of the break-even point.

Third, simultaneous changes in fixed and variable costs in the same direction cause a strong shift in the break-even point.

Fourth, a change in the selling price changes the contribution margin and the location of the break-even point.

In practical calculations, to determine the strength of operating leverage, the ratio of gross margin to profit is used:

Operating leverage measures how much profit will change if revenue changes by one percent. Thus, by setting a particular rate of growth in sales volume (revenue), it is possible to determine the extent to which the amount of profit will increase given the existing strength of operating leverage at the enterprise. Differences in the achieved effect at different enterprises will be determined by differences in the ratio of fixed and variable costs.

Understanding the mechanism of operation of the operating lever allows you to purposefully manage the ratio of fixed and variable costs in order to increase the efficiency of the current activities of the enterprise. This management comes down to changing the value of the strength of the operating lever under various trends in the product market conditions and stages of the enterprise’s life cycle.

In case of unfavorable conditions on the product market, as well as in the early stages of the enterprise’s life cycle, its policy should be aimed at reducing the strength of operating leverage by saving on fixed costs. If market conditions are favorable and there is a certain margin of safety, the requirement for implementing a regime for saving fixed costs can be significantly weakened. During such periods, an enterprise can expand the volume of real investments by modernizing fixed production assets. It should be noted that fixed costs are less amenable to rapid change, so enterprises with greater operating leverage lose flexibility in managing their costs. As for variable costs, the basic principle of managing variable costs is to ensure constant savings.

The margin of financial strength is the edge of an enterprise’s security. The calculation of this indicator allows us to assess the possibility of an additional reduction in revenue from product sales within the break-even point. Therefore, the margin of financial strength is nothing more than the difference between sales revenue and the profitability threshold. The margin of financial strength is measured either in monetary terms or as a percentage of revenue from product sales:

So, the strength of operating leverage depends on the share of fixed costs in their total amount and determines the degree of flexibility of the enterprise. All this taken together generates entrepreneurial risk.

One of the factors that “weights down” fixed costs is the increase in the effect of “financial leverage” with an increase in loan interest in the capital structure. In turn, operating leverage generates stronger profit growth compared to growth in product sales (revenue), increasing earnings per share and thereby increasing the power of financial leverage. Thus, financial and operating levers are closely related, mutually reinforcing each other.

The combined effect of operating and financial leverage is measured by the level of the conjugate effect of the action of both levers, which is calculated using the following formula:

The level of the conjugate effect of both levers indicates the level of total risk of the enterprise and shows by what percentage the profit per share changes when the volume of sales (revenue from sales) changes by 1%.

The combination of powerful operating leverage with powerful financial leverage can be disastrous for an enterprise, since business and financial risks mutually multiply, multiplying adverse effects. The interaction of operating and financial leverage exacerbates the negative impact of declining revenue on net profit.

The task of reducing the overall risk of an enterprise comes down to choosing one of three options:

1. A high level of financial leverage effect combined with a weak operating leverage effect.

2. Low level of financial leverage combined with strong operating leverage.

3. Moderate levels of financial and operating leverage effects, which are the most difficult to achieve.

In the most general form, the criterion for choosing one or another option is the maximum possible market value of the company's shares with minimal risk. As is known, this is achieved through a compromise between risk and profitability.

The level of the conjugate effect of operating and financial leverage allows making planned calculations of the future amount of profit per share depending on the planned volume of sales (revenue), which means the possibility of direct access to the dividend policy of the enterprise.

Control questions

2. Mechanism for managing enterprise costs.

3. Analysis of the influence of factors on the total cost.

4. The essence of the concept of “marginal income”

5. The concept of “break-even point”, “margin of safety”, “operating leverage”, “financial leverage”.

In Russian accounting practice, the terms “operational leverage” and “production leverage (leverage)” are also used.

The strength of operating leverage is determined by the ratio. The effect of operating leverage and its impact on profit

Methodology for calculating operating leverage

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